Avian Flu vs Dow Jones

The Global Risks prediction market that we built for the World Economic Forum (aka Davos) received some attention in the Financial Times online yesterday. Here’s a link to the story.

Global Risks PMThe article mentions the brand new markets we set up for Thomson Financial, which is a partner of the WEF’s Global Risks program. These markets, designed to forecast the impact that a hypothetical Avian Flu pandemic might have on the Dow Jones Industrial Average, are worth mentioning for several reasons:

First of all, they are true conditional markets, meaning that their purpose is not to forecast the future, but to forecast several alternative futures. In this case, it means forecasting the impact on the Dow of increasingly severe pandemic scenarios: from les than 20 countries with confirmed human cases of the disease, to more than 75.

Secondly, these are not markets in the conventional sense. Rather, we are using our innovative Competitive Forecasting design, where participants repeatedly enter and review their forecasts as high-low pairs of values and get scored, in the end, on how accurate and precise their forecasts turned out to be. This is easier to use than even the friendliest trading markets, primarily because it doesn’t artificially force participants to translate their forecasts into buy/sell decisions. They can just enter their forecasts directly with no extra mental gymnastics. It also yields richer prediction data than a mere sequence of prices and trading volumes. We’ve been implementing such Competitive Forecasting “markets” inside corporations for more than a year with great success (more about that later), but the Thomson/WEF implementation is a rare public showcase of this proprietory technology.

Finally, the Thomson/WEF markets are breaking some new ground: they may well be the first pure information markets – their only purpose is to generate information unavailable by other means – whose output is being carefully tracked by a major Wall Street “player”. When the hard core financial types start paying attention to play-money prediction markets, as in this case, it bodes well for wider acceptance of the technology.

Here are a couple of quotes from the Thomson Financial press release of November 27:

Jesse Fahnestock, Global Leadership Fellow, The World Economic Forum commented: “Most global risks are difficult or impossible to assess quantitatively, but in today’s competitive and interconnected business environment, understanding these risks is increasingly important. Predictive markets aggregate collective wisdom, helping to overcome perceptual and cognitive biases, and could be an excellent tool for investors and other decision makers struggling to understand the potential impact of risks such as avian influenza.”

Thomas Aubrey, Investment Management Director, Thomson Financial added: “The key to successful risk management is to focus on those risks that truly matter and ensure that the impact of these risks is understood and mitigated. Thomson Financial’s risk indicators help provide corporate executives with a balanced approach to understanding the new risk paradigm — highlighting those risks, be they financial or non-financial, which are really relevant”.

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